- The Washington Times - Wednesday, December 30, 2009


Last week’s growth report shows America’s economic hole is deeper than many thought. Such realization should cause re-evaluation. Simply tiding over and riding out a perceived economic cycle won’t work. Instead of quick-fix strategies, we must now accept the need for real solutions to our long-term problems.

The Commerce Department’s final verdict on America’s third quarter real economic growth was 2.2 percent. Since an initial 3.5 percent growth estimate, this last revision cuts 40 percent off the original projection. Granted, 2.2 percent growth is a great improvement over the preceding quarters. But that’s not saying much - the last four, and five of the last six, quarters were negative.

Some are rightfully beginning to look this gift horse of a recovery in the mouth. When an economy has contracted as much - and for as long - as this one has, a relatively robust recovery can be expected. This is because the economic “base” is diminished and even formerly routine growth looks comparatively large.

So far, that has not been the case.

And it might not be for some time to come. Congressional Budget Office Director Douglas W. Elmendorf said last month on unemployment: “Most of the pain of the recession is ahead of us, not behind us.” Such negativity was echoed by the Federal Reserve Board. It predicted the unemployment rate could remain as high as 7.5 percent by the end of 2012 and normal economic activity could take five to six years to resume.

There is a public resonance of this economic pessimism. An ABC News/Washington Post poll released Dec. 15 asked respondents whether the recession was over. Eighty-six percent said no. When asked whether “the U.S. is in a long-term economic decline … [or if] the country’s economic system is basically pretty solid,” 61 percent said it was in long-term decline.

A Dec. 16 an NBC News/Wall Street Journal poll similarly asked: “Do you feel confident that life for our children’s generation will be better than it is for us?” Only 27 percent felt confident; 66 percent were not.

All this comes despite an $800 billion stimulus bill earlier this year, effectively zero percent Fed interest rates, and a contracted economy that should magnify any economic growth’s effects.

There is strong argument that real problems exist and they are not temporary. Assuredly, the economy will grow again. But equally assuredly, there are reasons why it will not resume growth rates previously experienced.

Prior to this recession there was talk of the “wealth effect.” This was the population’s reaction to the impact that growing housing and investment values were having on their economic outlook. Their outlook translated into action, with consumers willingly accepting greater leveraging off their increasing wealth. The increased leveraging in turn increased economic activity.

Perhaps now is the time to begin talk of the reverse - a “poverty effect.” If people were willing to leverage off increasing asset values, why would they not be equally willing to deleverage on their assets’ decline? Just as the wealth effect had more than a simple psychological impact on the economy, so a poverty effect would as well.

The removal of market participants’ heightened leveraging - businesses and consumers alike - subtracts a strong fillip that drove the economy before the recession.

Excessive leveraging effectively masked our economy’s fundamental weakening. This is not a short-term problem. So it is time to accept that short-term solutions will not simply restore our economy to its former strength.

Fundamental reform is necessary and will be far more difficult than the quick-fixes we are so wont to embrace. It will mean getting federal spending under control. A government that consumes a quarter of the nation’s economy, as ours now does, leaves little for real wealth creation in the private sector.

It will mean altering our tax code to end its penalization of savings (which effectively favors consumption over investment) and lowering the corporate tax rate so that there is greater incentive to invest those savings here, rather than in competing economies.

It will mean taking a hard look at the level of regulation in our economy - asking not simply cost/benefit questions but, if new regulation is imposed, what compensating reductions will offset these increased costs?

Quick-fixes are not only relatively easy solutions, they are relatively optimistic ones, too. They implicitly say that if we take simple steps to temporarily tide us over, then things simply will return to where they were. Neither expert nor layman really believe this anymore. The time has come to act on these realistic beliefs, rather than our optimistic hopes.

J.T. Young served in the Treasury Department and the Office of Management and Budget in 2001-04 and as a congressional staff member from 1987 to 2000.

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